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Keep more of what you make: Don't allow the tail to wag the dog

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The gem you didn't know about until now

Direct indexing is an investment strategy that lets you replicate the performance of a market index by directly owning the individual stocks within it, instead of buying an index fund or ETF. Everyone loves to tell you how the S&P 500 did today or the Dow Jones Industrial Average, but do they know what they're talking about and can you actually invest in those? The short answer is no. For starters, those indexes have no fees. That's right. Zip, zero, nada. You can't invest in them because there isn't a vehicle or mechanism to do that without a price. Nobody is going to managing them or work free. Not the last time I checked. You can however pay a fund manager or ETF to try and mimic the outcome of those indexes. Here's a breakdown of the key concepts of Direct Indexing and how it benefits investors:

Traditional Options:

  • ETFs (Exchange-Traded Funds): These are baskets of securities that trade like stocks on exchanges. They passively track an index, offering diversification and low fees. Yes they have come out with different variations of these like actively managed or smart beta, but they are not going to be as active as a mutual fund.

  • Mutual Funds: These are professionally managed pools of investor money that invest in various assets. They also aim to track indexes or follow specific investment strategies. These have been around the longest and most families have invested in these at some point in their life. The majority of retirement accounts still have the majority of holdings in funds like these.

  • Indexes: These are benchmarks that represent a specific market segment. For example, the S&P 500 tracks the performance of 500 large-cap U.S. companies.

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Direct Indexing vs. Traditional Options:

  • Customization: Direct indexing allows for some customization. You can exclude certain stocks from the index that don't align with your values (e.g., tobacco companies, political ties, country-specific, etc). Traditional options provide limited to no customization. You wouldn't be able to tell a mutual fund manager not to buy XYZ stock because you've worked there most of your life and don't like the direction of the company. It won't happen.

  • Tax Advantages: This is a major perk. With direct ownership of stocks, you can practice tax-loss harvesting – selling stocks at a loss to offset capital gains from other investments, potentially lowering your tax bill.  Mutual funds and ETFs don't offer this granular control. That means you could make money in your investment and show the IRS and your state that you actually lost money. That could leave you with little or no tax or potentially a loss you can carry forward.

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Benefits of Direct Indexing:

  • Potential Tax Savings: Through tax-loss harvesting, you can reduce your taxable income and potentially keep more money in your pocket. That's a huge win in my book.

  • Increased Control: You have more control over your portfolio composition compared to traditional index funds and other investment vehicles. Choose what fits into your plan, and not the other way around. Nobody likes jamming a square peg into a star-shaped opening.

  • Alignment with Values: You can tailor your portfolio to align with your ethical or social beliefs. Again, another area of the investment world that is exploding. People want to have the ability to take more control and have a say in what they own.

Sophistication and Customization:

Direct indexing can be complex. It requires researching and selecting individual stocks, rebalancing the portfolio regularly, and managing tax implications. However, several brokerages offer managed direct indexing services, making it more accessible to retail investors.

Example: Minimizing Capital Gains Tax

Let's say you own a mutual fund with significant gains but a low-cost basis (the price you paid for the shares). Selling it would trigger a large capital gains tax. Direct indexing allows you to sell the mutual fund and directly invest in the underlying stocks. You can then strategically sell some of those stocks at a loss to offset the gains, reducing your tax burden significantly over time.

Net Returns and Direct Indexing:

By minimizing taxes through tax-loss harvesting, direct indexing can potentially lead to higher net returns (money you keep after fees and taxes) compared to traditional index funds or ETFs. However, it's important to consider advisory fees associated with managed direct indexing services.

Important Note:

Direct indexing is generally recommended for taxable accounts, not tax-advantaged accounts like IRAs, but that doesn't necessarily mean they have no benefit being utilized in a retirement account either. Weigh your options and have a discussion with one of our team members to make educated decisions with your investment assets.


  • Direct indexing requires more effort for managed services compared to traditional options and more transparency with cost.

  • It's important to consult with a financial advisor to see if direct indexing aligns with your investment goals and risk tolerance.

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